In re Summit Hardware, Inc.

• Decision Date: 19 April 1962
• Docket Number: No. 14548.,14548.
• Parties: In the Matter of SUMMIT HARDWARE, INC., Bankrupt. John A. SCHWEMLER, Trustee in Bankruptcy, Plaintiff-Appellant, v. Everett L. FOOTE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

302 F.2d 397 (1962)

In the Matter of SUMMIT HARDWARE, INC., Bankrupt.

John A. SCHWEMLER, Trustee in Bankruptcy, Plaintiff-Appellant, v. Everett L. FOOTE, Defendant-Appellee.

No. 14548.

United States Court of Appeals Sixth Circuit.

April 19, 1962.

Clair E. Whitmer, Akron, Ohio (Kent W. Woodward, Johnson, Whitmer & Sayre, Akron, Ohio, on the brief), for appellant.

Clarence W. May, Akron, Ohio (Brouse, McDowell, May, Bierce & Wortman, Akron, Ohio, on the brief), for appellee.

Before MILLER, Chief Judge, WEICK, Circuit Judge, and MAGRUDER, Senior Circuit Judge.

WEICK, Circuit Judge.

This case involves the question whether a factor's lien on inventory taken as security for the payment of a loan was valid under Ohio law as against the creditors of the bankrupt borrower.

The material facts, with one exception, were not in dispute.

The bankrupt, Summit Hardware, Inc., an Ohio corporation, was engaged in the business of selling hardware at retail. On December 17, 1957 it negotiated a loan from the factor, Everett L. Foote in the amount of $25,000 to finance its operations and pay creditors. The loan was evidenced by a promissory note executed by the bankrupt to the factor payable six months after date and bore interest of 5% per annum. The loan was secured by a chattel mortgage on certain of the bankrupt's fixtures and a factor's lien on its inventory. The loan was further secured by a pledge of the capital stock of the bankrupt owned by two of its principal officers. The pledge agreement provided that unless the note was paid within one year, Mr. Foote had the option to purchase one-half of the bankrupt's outstanding capital stock for $100.00. In the event the option was exercised, the full amount of the loan would then be payable twenty months after the date of the note and the bankrupt or its shareholders could then satisfy the note and repurchase the shares of stock for the total sum of $50,000.00.

The Agreement for Factor's Lien was executed by the parties on December 17, 1957 and a notice of the lien was duly filed with the recorder of Summit County, Ohio on December 19, 1957. In the agreement the bankrupt

"hereby gives, grants and pledges to the said Factor, Everett L. Foote, a lien on all its hardware, screws, nuts, bolts, work in process, tools, merchandise, and all other chattel property, excepting the fixtures in said building and the office equipment permanently there, including any and all chattel property held for sale, a list of which is attached hereto marked `Exhibit A\' and made a part hereof, to cover the aforesaid note in the amount of Twenty-five Thousand Dollars ($25,000.00) and to cover any advances, loans or credits hereafter granted by the said Everett L. Foote. Said Factor\'s lien shall cover any and all chattel property including nuts, bolts, hardware, tools, supplies, or merchandise hereafter acquired. This lien shall remain in full force until the aforesaid Twenty-five Thousand Dollars ($25,000.00) note and any other advances, loans or payments made by the said Everett L. Foote to or on behalf of said Summit Hardware Inc. are fully paid. It is further expressly agreed that the said Summit Hardware Inc., Borrower, shall be entitled to sell any of said merchandise in the regular course of business, without incurring any liability whatsoever.

"It is further agreed that Summit Hardware Inc. shall furnish to Everett L. Foote each thirty (30) days or oftener a list of all merchandise acquired by it and shall at any time at his request furnish a list of all merchandise which it has on hand.

"It is also agreed that in the event said note becomes due and payable and is not paid or in the event of any execution being issued against said property or in the event of any receivership or bankruptcy filed by or against Summit Hardware Inc. or any other legal action taken against said Borrower or the Factor deems himself insecure, then the said Everett L. Foote shall be entitled to take possession of such merchandise, heretofore described, as remains on hand and shall be entitled to sell the same at public or private sale, on such terms of credit as he deems proper, and shall apply the proceeds thereof to the payment of said advances or debts due to the said Everett L. Foote, Factor.

"It is further stipulated that in the event Everett L. Foote elects to take over the merchandise heretofore described, then he shall be entitled to liquidate same in such manner as he sees fit, or, if he desires to continue to operate said business, he may do so and over a period of time apply the profits from said operation to the amount owed to him by Summit Hardware Inc.

"This Agreement shall remain in effect for three (3) years from the date hereof but may be renewed from time to time.

"In the event said Summit Hardware Inc. is for any reason dissolved or liquidated then said Everett L. Foote likewise shall be permitted to take possession of said goods and merchandise, and sell same as afore set forth."

No "Exhibit A" was attached to or made a part of the agreement.

The fact in dispute between the parties was whether written statements dated and signed by the bankrupt designating the merchandise upon which the lien shall attach had been furnished. Both the Referee in Bankruptcy and the District Court, however, found that no such statements had ever been furnished. We accept this finding of fact.

An involuntary petition in Bankruptcy was filed in the District Court against Summit Hardware, Inc. on September 25, 1958 which resulted in its adjudication as a bankrupt.

The trustee in bankruptcy filed a petition to sell the assets of the bankrupt. The factor filed an answer and cross-petition for reclamation. The trustee filed a reply thereto asserting that the factor's lien on inventory was invalid as to the creditors of the bankrupt because of failure to comply with the Ohio statutes creating the factor's lien.

The Referee in Bankruptcy adopted findings of fact and conclusions of law and held that the factor's lien was invalid.¹ On review, the District Court reversed and held that the factor's lien was valid. 192 F.Supp. 489 (N.D., Ohio)

Whether the factor had a valid lien must be determined by the recording laws of Ohio. Holt v. Crucible Steel Co., 224 U.S. 262, 32 S.Ct. 414, 56 L.Ed. 756; Lewis v. Manufacturers National Bank of Detroit, 275 F.2d 454, 457 (C.A.6) affirmed 364 U.S. 603, 81 S.Ct. 347, 5 L. Ed.2d 323.

The pertinent Ohio statutes providing for the factors lien are as follows:

"§ 1311.60 Lien of factor.

"If it is provided by a written agreement with the borrower, a factor shall have a lien upon such merchandise owned by and in the custody or possession of the borrower, including such merchandise as is temporarily out of the borrower\'s custody or possession, as is from time to time after the execution of said written agreement designated in separate written statements dated and signed by the borrower and delivered to the factor. Such lien shall secure the factor for all his loans and advances to or for the account of the borrower, together with interest thereon, and also for the commissions, obligations, indebtedness, charges, and expenses properly chargeable against or due from said borrower and for the amounts due or owing upon any notes or other obligations given to or received by the factor for or upon account of any such loans or advances, interest, commissions, obligations, indebtedness, charges, and expenses. Such lien is perfected and valid from the time of filing the notice referred to in sections 1311.61 to 1311.64, inclusive, of the Revised Code, whether such merchandise is in existence at the time of the execution of the written agreement providing for the creation of the lien or at the time of filing such notice, or comes into existence subsequently thereto, or is subsequently acquired by the borrower; provided a notice of the lien is filed as set forth in section 1311.61 of the Revised Code."

"§ 1311.62 Superior liens.

"Upon the filing provided for in section 1311.61 of the Revised Code, the lien of the factor shall be effectual upon and shall attach to the property from time to time designated in the written statements provided for in section 1311.60 of the Revised Code, as against all claims of unsecured creditors of the borrower and as against subsequent liens of creditors, except that, notwithstanding the prior perfection of the lien of the factor under section 1311.60 of the Revised Code, specific liens arising out of contractual acts of the borrower with reference to the processing, warehousing, shipping, or otherwise dealing with the merchandise in the usual course of the borrower\'s business, preparatory to their sale, shall be superior to the lien of the factor on said merchandise, whether or not filing has occurred under section 1311.61 of the Revised Code. This section does not obligate the factor personally for any debt secured by such superior lien. When merchandise subject to the lien provided for by sections 1311.59 to 1311.64, inclusive, of the Revised Code, is sold in the ordinary course of the business of the borrower, the purchaser takes the said merchandise free and clear of the lien, whether or not he has knowledge of the existence thereof."

No Ohio cases construing these statutes have been cited to us and we have found none.

The factor was not unknown at common law although he has been subjected to a metamorphosis by legislative enactments. Judge Hartshorne has stated in In re Tele-Tone Radio Corp., 133 F.Supp. 739, 746 (D.C.N.J., 1955) that: "The factor at common law was an agent employed to sell goods for a principal and receive a commission thereon. * * * The factor had a lien on the goods for any advances made by him and for his commissions."² See also, 35 C.J.S. Factors § 1, p. 496; 22 Am.Jur., Factors, § 2, pp. 307-308.

It was emphasized, however, that the common law factor's lien existed independently of any agreement. Judge Hartshorne added at...